It's Payback Time for Goldman Sachs

Getting rid of TARP funds could be a turning point for Goldman Sachs.

When Goldman Sachs(NYSE:GS) reports first-quarter earnings tomorrow, investors are bound to shove one question front and center: When, for Pete's sake, will it pay back the $10 billion of TARP money? The whole "guilt by association" thing is getting old.

If its stock keeps blowing up (shares have doubled since January), the answer might be sooner rather than later. The Wall Street Journal reports Goldman is contemplating a stock offering that would allow it repay taxpayers in full.

Of course, we've been hearing similar buzz for a few months now. Banks like JPMorgan Chase(NYSE:JPM) and Wells Fargo(NYSE:WFC) are dying to ditch the money as well.

Why might this round of rumors actually hold some teeth? Because Goldman shares are now the highest they've been since last October. With a market cap of $60 billion, Goldman could raise several billion in a stock offering, dilute shareholders by a sensible amount, and suddenly be in a TARP-less, Congressional-hearing-free land of financial bliss.

More than almost any other bank, paying back the funds makes sense for Goldman. Through a combination of shorting subprime assets in 2007 and quickly deleveraging when things turned south last fall, it doesn't really need the capital at all. Without TARP funds, Tier 1 capital would shrink from 15% to 13% -- still a fortress-like number by any definition.

And don't kid yourself -- a TARP-free Goldman would be one of the most powerful Goldmans you've ever seen. Without the chains of executive pay restrictions and the media digging through operating expenses with a magnifying glass, Goldman could pick off top talent from peers like Citigroup(NYSE:C) and Bank of America(NYSE:BAC), whose ability to thrive is now anchored by Washington's wrath. Goldman could also swarm into opportunistic sections of the market, such as buying mortgage assets on the cheap, without the objection of using taxpayer funds to exploit public misery.

Most importantly, paying back TARP funds is a big win for taxpayers. For once, we'll get some cash flowing to the other side of the Treasury's coffers. $10 billion down, a few trillion to go.